BOJ offers Reuters the best view of the region in Japan in 8 years

By Leika Kihara and Daniel Leussink

TOKYO (Reuters) – The Bank of Japan on Wednesday offered a more optimistic outlook for the country’s regional economy on Wednesday for more than eight years, a sign of confidence that the recent resurgence of coronavirus infections will not prevent the country’s fragile recovery.

A good assessment boosts the BOJ’s ability to revise its annual growth and price forecasts, which will begin in April, in new projections for next week.

“The Japanese economy is on the rise, although it is still in dire straits as a result of the coronavirus pandemic,” Bou Governor Kuroda Haruhiko said in a speech to the bank’s regional branch officials on Wednesday.

Kuroda also said that consumer inflation will gradually pick up as demand rises.

The rise in energy and commodity costs is a sign that Japan is emerging as a new threat to the recovery, however, a Reuters Tankan survey showed on Wednesday that manufacturers became less positive about business conditions in January.

The survey highlights the dilemma facing Japan as a country that relies heavily on fuel and food imports, and makes its economy vulnerable to the kind of cost-cutting inflation that is now underway.

While the rise in inflation is a welcome step towards the BOJ’s 2% price target, there is a risk that higher living costs will cool consumption and encourage companies to raise prices, returning Japan to deflation.

A separate survey showed that while the sentiment in the service sector improved in December, an index that measures forecasts worsened due to uncertainty about the impact of the Omicron variant.

So far, the BOJ has been quietly taking such risks.

In a quarterly report on the Japan region, the central bank raised its economic assessment for nine regions – the first time since October 2013.

Consumption assessment was also reviewed in nine regions, for the first time since the BOJ began publishing its report in 2005.

“All regions said their economies were growing or showing signs of a rise as the impact of pandemic service consumption was somewhat mitigated,” the BOJ said in a report.

The Japanese economy shrank in the third quarter of last year due to supply cuts and pandemic-curbing activities that affected factory production and consumption.

Analysts expect growth to rebound in October-December and the current quarter as production and consumption rise, although the recent rise in Omicron infections is clouding the outlook.

The regional report and the Reuters Tank will likely be among the factors that the BOJ will consider in next week’s policy review.

The BOJ is expected to maintain its ultra-loose policy, but stresses the rise in inflationary pressures that could change the balance of risk in price forecasts.

With inflation far from the BOJ’s 2% target, however, Governor Kuroda is likely to stress that the central bank is ready to keep its money loose.

Although wholesale prices rose by a record 9.0% year-on-year in November, soft wage growth and consumption kept core consumer inflation down by 0.5% in November.